Template-Type: ReDIF-Paper 1.0
Author-Name: Francesca Carapella
Author-X-Name-First: Francesca
Author-X-Name-Last: Carapella
Author-Name: Cyril Monnet
Author-X-Name-First: Cyril
Author-X-Name-Last: Monnet
Title: Dealers' insurance, market structure, and liquidity
Abstract: We develop a parsimonious model to study the effect of regulations aimed at reducing counterparty risk on the structure of over-the-counter securities markets. We find that such regulations promote entry of dealers, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative effect on market-making profitability. General equilibrium effects imply that more competition can distort incentives of all dealers to invest in efficient technologies ex ante, and so can cause a social welfare loss. Our results are consistent with empirical findings on the effects of post-crisis regulations and with the opposition of some market participants to those regulations.
Length: 78 pages
Creation-Date: 2020-05
File-URL: https://www.bis.org/publ/work861.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work861.htm
File-Format: text/html
Number: 861
Classification-JEL: G11, G23, G28
Keywords: liquidity, dealers, insurance, central counterparties
Handle: RePEc:bis:biswps:861